To Whom Do Banks Channel Central Bank Funds?

Peter Bednarek*, Valeriya Dinger, Daniel te Kaat, Natalja von Westernhagen

*Corresponding author for this work

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Abstract

This paper examines the relationship between central bank funding and credit risk-taking. Employing bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that banks borrowing from the central bank rebalance their portfolios towards ex-ante riskier firms. We further establish that this effect is driven by the ECB’s maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we show that these shifts in bank lending are associated with an increase in firm-level investment and employment, but also with a deterioration of bank balance sheet quality in the following year.
Original languageEnglish
Article number106082
JournalJournal of Banking and Finance
Volume128
Early online date11-Feb-2021
DOIs
Publication statusPublished - Jul-2021

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